This article briefly sets out the benefits of voluntary disclosures but highlights some significant negative aspects of the way that IRD sometimes administers them.
IRD encourages taxpayers to make voluntary disclosures of tax shortfalls.
A generic IRD letter states as follows:
We do encourage people to self-correct errors in tax positions before we find it. If your client does tell us about an error, it’s called a ‘voluntary disclosure’.
IRD discussed the process in its IR280 guide.
Crucial benefits of voluntary disclosures are:
If a voluntary disclosure is made before any announcement of audit or investigation:
A minimum 75% reduction in shortfall penalties, and in many cases a full remission, plus an immunity from prosecution should a shortfall comprise a criminal offense such as tax evasion
If a voluntary disclosure is made after notification but before an audit or investigation actually commences:
A 40% reduction in any applicable shortfall penalties, and possibly immunity from prosecution
More generally, a sign of willingness to cooperate with IRD.
I strongly support the underlying principle, and indeed was closely involved in the development of the concept.
However there are a number of aspects that can detract from the benefits.
- IRD notifies an audit at an early stage when it would be better to advise a risk review and work collaboratively
- IRD notifies an audit and explicitly invites a voluntary disclosure but fails to state when the audit will commence. Taxpayers don’t realise they have an opportunity for a post notification disclosure
- IRD sometimes takes weeks if not months to acknowledge receipt, let alone actually deal with some voluntary disclosures
- A voluntary disclosure can lead to a seemingly endless round of further enquiries
- Voluntary disclosures may be for tax that IRD would never have found out about, but IRD automatically apply backdated interest at their usurious rates
- IRD sometimes neglects to apply a ‘new due date’, so they apply late payment penalties as well. Backdated debt can compound at up to 25 30% per annum depending on the applicable UOMI rate – see our recent article here.
We have raised all of the above with IRD from time to time, but IRD seems to be oblivious of the negative impact on the ability to encourage voluntary disclosures.
One possible tactic may be to provide IRD the relevant information on a no names basis and try to seek advance agreement on the terms of a settlement. It is a pity to have to do this when an open, collaborative and fair approach would achieve the same outcome but at much lower cost to all parties.
As always, we have drawn IRD’s attention to this article and will update it should there be any demonstrable improvements.